Greenberg: The Next Chinese Stock ‘Story’ (Updated)

That appears to be setting itself up as a new strategy for Chinese reverse mergers, especially those whose stocks have tumbled (which is many.)

Since October four companies, apparently not happy with their valuations or the increased scrutiny of Chinese reverse mergers, have announced that they’re looking at going private.

Just one problem: So far it has been all talk, with little in the way of detail – and no action.

Here are the players and their proposals:

Harbin Electric. In October Harbin Electric announced plans to go private with Baring Private Equity Asia Group as its partner. Then, on November 23, after Roddy Boyd’s thefinancialinvestigator.com raised questions about its financials, Harbin announced that Baring no longer planned to be partners in a buyout.

Not to worry: Baring instead will receive a “right” to provide 10% financing to the deal. Harbin CEO Tianfu Yang said at the time he “intends to proceed with a proposal to take the company private” at $24.

Since then, the company has been mum — and its stock, which rose to just under the proposed deal price when it was originally announced, now trades around $17. In its earnings release today, the company said a special committee formed by the company's board is continuing to review Yang's proposal.

Next Chinese Stock Scheme?

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Fushi Copperweld. On November 3, Fushi Copperweld announced that CEO Li Fu and Abax Global Capital had proposed taking the company private at $11.50 cash. As expected, Fushi’s stock bounced.

Then, on March 1, Fushi announced that it had hired BofA as its advisor for the proposed deal, adding, “No assurance can be given that the proposal, or any other transaction, will be consummated.”

Comes March 11 and (oops!) Fushi announced that it “was reevaluating the application of generally accepted accounting principles ("GAAP") in certain accounting treatments applied to its 2007, 2008, and 2009 financial results as well as its previously filed quarterly financial statements for the first three quarters of 2010.” (Its stock has continued to sink.)

China Fire & Security. On March 7, China Fire & Security Group said it had received a “non binding” letter from a “leading global private equity firm” with a proposal to take the company private at a price that “represents a premium to the current stock price.” (Teases like that — with buzzwords like "leading" player without mentioning a name and "premium" price without a number — are always red flags, not to mention, in my opinion, bush league.)

Its stock, rising in days before the announcement, ended at 25% above its February lows on the announcement before falling back to pre-deal levels.

China Security and Surveillance. Then there’s China Security and Surveillance, whose accounting and ownership structure has been in-and-out of the spotlight over the years: In January its CEO, Guoshen Tu sent the company a letter saying he was thinking about submitting a proposal to take the company private at a price not above $6.50 a share — a fraction of what it once was. Then, on March 8, Tu submitted a formal proposal. Its stock popped from around $4 to $5, before settling back.

My take: Like so much of what we’ve seen with Chinese reverse mergers and their promoters, these announcements of proposed deals appear to be designed more as a way to spark interest in a deal — hoping somebody else comes along, which may happen but doesn’t appear to be. (Plenty of desperate U.S. companies have played that game over the years, to no avail.) It’s not really that much different than a company announcing that its board has authorized a stock buyback, even though the company winds up never doing one.

It’s no wonder they want to give the illusion of trying to somehow create value: A recent study by International Strategy & Investment shows that since 2005, 78 Chinese reverse mergers in the U.S. with market caps above $100 million have “sharply” underperformed their 84 Chinese IPO counterparts.

That should be of no surprise. These companies went public through the backdoor for a reason: They wouldn’t (or shouldn’t) have made it through the front door. Their share prices prove it.